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In each of the following cases, will CPI truly capture the cost of living? Why? 1

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In each of the following cases, will CPI truly capture the cost of living? Why? 1. There is a change in the relative prices of goods and services in the CPI basket? Yes - becase Since CPI • adjustments in quantities, it - the cost of living. 2. When a new good is introduced in the market? • because valuable and new goods to the consumer basket makes a dollar than it actually is. 3. When there is improvement in the quality of goods: • because and adjusting the quality of goods in the basket makes a dollar is * valuable than it actually is. 4. Substitution bias, the introduction of new goods overtime and changes in quality overtime are considered as some of the problem with CPI which overstates inflation. Why is this issue important? ANSWER: The issue is important because many governments transfer programs (such as Social Security) are tied to increases in the CPI. Which means that these payments when CPI increases and when CPI decreases. Q3) A) YES OR NO B) C) ALOW OR FAILURE TO ALLOW D) LESS OR MORE Q4) A) INCREASE OR DECREASE B) INCREASE OR DECREASE Q1) A) YES OR NO B) the CPI basket allows people to adjust quantities by purchasing less of the expensive items and more of the cheaper CPI uses a fixed basket of goods and services where the list, quantities and quality of goods and services are fixed at the C) ALOW OR DOSE NOT ALLOW D) OVERSTATES OR UNDERSTATES Q2) A) YES OR NO B) the CPI basket adjusts for the quality of goods in the CPI basket CPI uses a fixed basket of goods and services where the list, quantities and quality of goods and services are fixed at the FORTIC Luany 13. CALOW ADDING OR FAILUR TO ALLOW ADDING D) LESS OR MORE